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Making Sense Corporate Sustainability and ESG’s History – A Primer for Board Members

JUNE 2024 | SPECIAL REPORT

While ESG has grown in prominence in recent years, its historical roots extend back decades. This article explores its history and key milestones in an effort to equip leaders with the foundational understanding to competently manage ESG in their businesses.

Corporate leaders find themselves at a historic inflection point of corporate governance – with increasing pressures from investors, customers, insurers, the public, and regulators – the “business of business is business paradigm” is actively being reconfigured. The roles of and interaction between the board, management, and shareholders will now require a broadened scope of risks and opportunities under the broad umbrella of Corporate Sustainability, Climate, and ESG (Environmental, Social, Governance).

Although more prominently showcased and debated over the past five years, ESG’s roots go back decades. To better equip leaders with context and longitudinal perspective, we have developed a comprehensive overview of the evolution of ESG, from the origination of Corporate Sustainability to its current crescendo. Moreover, we have extracted key questions to raise in the boardroom as directors prioritize critical trends and risks as part of the hastening global energy transition, burgeoning regulatory environment, and intensifying climate shocks.

1950s-1970s: Raising Concepts of Social Responsibility and Social Protests 

Many attribute the origins of Corporate Social Responsibility (CSR) with Howard Bowen’s “Social Responsibilities of the Businessman” in 1953. At the same time, those who had been championing the supremacy of shareholder profit maximization, Adolf Berle, Gardiener Means, Milton Friedman, etc., started to face heightened resistance from academics, business leaders, and the public for greater social responsibility, environmental stewardship, and corporate accountability. The premise that was being directly challenged was the heart of Friedman’s doctrine: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” 

A subsequent rise in public activism in the 1960s fostered more in-depth debate on a company’s role in social, environmental, and political issues. As a result, in the 1970s the Environmental Protection Agency (EPA) and associated legal mechanisms to protect the environment were established to address increasing public awareness and concern over pollution, environmental degradation, and health issues caused by industrial activities. 

1980s-1990s: Corporate Sustainability’s Entrance to Capital Markets and the UN Takes Lead  

A key theme in the 1980s for management was globalization – be it from the fall of the Berlin wall, globalization of Japanese cars, European integration, technological advances – business horizons expanded. As a driver of globalization, the World Bank became more involved in shaping economic development strategies across the Global South. Every country pursued growth, but severe environmental issues like pollution, drought, ozone depletion, deforestation became unavoidable and were highlighted as key barriers.  Thus, in 1983 the United Nations (UN) established an autonomous body to investigate the connection between human activity and the environment; this new organization, the Bruntland Commission, issued a 1987 report that catapulted the concept of sustainable development to the forefront of global discourse.  

Furthermore, in 1992, the United Nations Environment Program (UNEP) acknowledged the role of financial institutions in fostering a sustainable economy and lifestyle. Later that year, at the Rio Earth Summit, 154 countries signed the landmark United Nations Framework Convention on Climate Change (UNFCCC) and started what we now know as COP (Conference of the Parties) 

These globalization trends were bolstered by massive liquidity infusions in capital markets and focused on ESG-types of investments. The rise of Socially Responsible Investing (SRI) in the 1980s and 1990s is attributed to the end of the defined benefit pension plans and the rise of defined contribution plans that provided a pool of permanent liquidity in capital markets. Which, in turn, helped make SRI and the Corporate Sustainability mainstream.  

Correspondingly, there was a proliferation of investment names and acronyms to signal a different investment theses and themes: “values-based investing,” “conscience investing,” “green investing,” “impact investing,” “gender lens,” “fossil fuel free,” and others. This built broader corporate and public awareness and streamlined the involvement of corporate sustainability in capital markets.

2000s: The Fall of Enron and Call for Better Governance  

The 2000s came with a series of corporate scandals that unleashed broad demand for enhanced business oversight and practices, which was highlighted by the fall of Enron and the BP Deepwater Horizon oil spill in the Gulf of Mexico. In response, former UN Secretary-General Kofi Annan wrote to over 50 CEOs, urging them to join an initiative under the UN Global Compact 

Soon thereafter, the UN Global Compact issued the Who Cares Wins Report, which established the crucial link between ESG actions, financial markets, and financial performance. Also, it was the first time the term ‘ESG’ (Environmental, Social, and Governance) came on the scene.  

Another critical push to understand the implications of ESG factors on investment was the 2006 launch of the Principles for Responsible Investment (PRI) by 63 investment companies with $6.5 trillion in assets under management. Each of these companies expressed their understanding of and commitment to the management of environmental, social, and governance issues as integral to companies’ competitiveness in a globalized world.  

Finally, the Carbon Disclosure Project (CDP) began in 2000 and aimed to create a global economic system that mitigates climate change. The motivation of the CDP framework to transform capital markets by shifting businesses to prioritize environmental reporting and risk management. In 2002, CDP established its environmental disclosure program, and has since grown to be the platform for over 8,400 companies in 800 cities and 120 states and regions.  

2010s: Formalization of ESG Standards and Global Commitments and the Emergence of ESG Rating Agencies  

In 2011, Jean Rogers founded the Sustainability Accounting Standards Board (SASB) to develop accounting rules that could reflect ESG’s impact on a company’s bottom line in a specific industry.  

Continuing its leadership on the global stage, the UN introduced the 17 Sustainable Development Goals (SDGs) in 2015 and facilitated the signing of the Paris Agreement. At the same time, the Financial Stability Board (FSBI) established the Taskforce on Climate-related Financial Disclosures (TCFD), which offered reporting guidelines for climate-related disclosures, and the Global Reporting Initiative (GRI) introduced the GRI Standards. 

At the World Economic Forum (WEF) 2017 summit in Davos, over 140 CEOs signed The Compact for Responsive and Responsible Leadership. They committed to aligning their goals with the UN’s SDG and recognize that serving society’s long-term goals garners benefits for shareholders and stakeholders. Also facilitated by Davos, the consensus metrics were established to create a systematic “market-driven” set of 22 metrics as part of WEF’s International Business Council. 

Finally, by 2019, nearly 200 CEOs gave their pledges to the Business Roundtable’s statement on the purpose of a corporation: Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth. While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. 

For corporates, there was also a growing expectation of shareholders to implement ESG criteria. In May 2017, 62% of ExxonMobile shareholders went against management’s recommendations by voting to require the worlds largest oil and gas company to report on the impacts of climate change to its business (an increase of 38% over the previous year).  

To serve the growing pool of ESG investors and the increasing demand for data, index providing rating agencies have created their own ratings to evaluate ESG factors. The four major rating agencies for ESG that dominate the current market included MSCI, Sustainalytics, RepRisk, and ISS 

2020s: ESG Goes Mainstream and Climate Litigation Risks Intensify 

Today ESG plays a more prominent role than even in determining investment decisions, shaping business strategies, and influencing the global economy.  

The global COVID pandemic brought new light to broad social issues and injustice to the corporate stage and led to the scaling of Diversity Equity and Inclusion (DEI) initiatives. With the rise of ESG’s salience has also come with a rise of scrutiny for corporates who may be “greenwashing” as well as its broader politicization. 

The policy-front continues to boom. From the US perspective, the SEC has issued its first-ever Climate Disclosure requirement, which is still in evaluation. Moreover, state-wide action is ramping up, with California issuing its own Climate Disclosure requirements and other states (New York, Illinois, etc.) following suit. Meanwhile, Europeans continue to drive the most stringent reporting requirements with the European Climate Law, Corporate Sustainability Reporting Directive (CSRD), carbon import tax, and others.  

Front and center for all board members should be the increasing risks for climate litigation, especially with the material advancements of climate attribution science. Legal precedent is being set in the US and across the world that will hold corporations and their directors responsible for environmental degradation.  

Finally, impact- and ESG-related investments continue to boom. In 2020, it is estimated that nearly $2.3 trillion USD were invested with intent for impact, of which $594 billion was managed by private funds and institutions, and $1.7 trillion by development finance institutions (DFIs) and development banks.  

What happens next? 

Looking forward, we see more regulations being introduced at local, state, national, and international levels to disclose on Sustainability, ESG, and Climate themes. There will also be intensifying pressure to make disclosure reporting more harmonized, specific, and consistent within each industry sector. 

Business leaders should work to understand the range of opportunities with the commercialization of national and global carbon markets, with so much focus given to this topic at COP28. Business leadership should take this opportunity to review existing tools to support climate finance such as green bonds and internal carbon pricing in the immediate term and continue to track whatUS Climate Envoy John Kerry predictsas the greatest business market in the history of humanity. 

With increasing stakeholder expectations to disclose nature-related corporate information, board directors and C-level leaders should consider reviewing whether nature is included within the organization’s net-zero strategy and whether it is a topic to raise in the boardroom. Business leaders should also keep in mind that governments may suggest or enforce nature-related disclosure for businesses by potentially adopting recommendations from theTaskforce on Nature-related Financial Disclosures(TNFD), which launched its sector guidance at COP28 and will be reviewed at COP16 in Cali, Colombia. 

Another key question is around climate risks, but physical and transition. With insurers pulling out of markets and premiums increasing materially, some as much as 20-40% over the past several years, climate risks will have to be mitigated and managed outside of insurance policies.  

Key takeaways for board members: 

  • Modern ESG has a long history, with the question of corporate accountability and governance at its heart  
  • Although for much of its history, ESG and Corporate Social Responsibilities activities were considered “nice-to-have’s”, more so they are being regulated and considered tablestakes  
  • Companies that operationalize, measure, and report on ESG and Climate risk may gain better access to capital and will have greater long-term resilience  
  • Understanding the granularities of ESG and Sustainability will need an industry-specific lens 

Questions for the boardroom: 

  • How do you ensure you have sufficient director-level experience to oversee upcoming ESG, Sustainability, and Climate disclosures? 
  • Given the proliferation of climate litigation risk, how do we ensure our readiness? 
  • How does the management team see key issues of supply chain transparency, decarbonization, biodiversity impacting their 5- to 10-year plans?  
  • Given that physical climate risks are happening more rapidly with more intensity than models predicted, how can management teams best improve their readiness? Better understand their current and future exposures?  
  • What are specific trends happening that are unique to the company’s industry that require specialized reporting, disclosure, risk management expertise? 

Additional Telesto resources: 

Find additional information on how to get started with ESG, learn more about key Sustainability trends for 2024, review COP28 takeaways, build topical familiarity with our ESG Glossary as well as Telesto’s ESG Maturity Model 

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